Third-quarter earnings season will unofficially kick off this week, as aluminum giant Alcoa Inc. (AA) steps into the earnings confessional.
Alcoa has struggled with falling commodities prices for the past year, but the Federal Reserve’s lack of action on interest rates has provided a short-term boost for Alcoa stock. Furthermore, a potential Airbus deal and Alcoa’s board-approved company split have also reinvigorated AA bulls.
For the record, Alcoa is expected to post a third-quarter profit of 14 cents per share, down from 31 cents last year, with revenue seen falling 9% year-over-year to $5.68 billion. Despite poor comparisons to its last year, Alcoa earnings have been solid during the past two years. In fact, the company has bested Wall Street’s estimates in six of the past eight quarters.
Many on Wall Street, however, remain wary of the commodities company. The whisper number for Alcoa’s third-quarter earnings arrives at 13 cents per share, a penny shy of the consensus view. Additionally, Thomson/First Call reports that seven of the 16 analysts following Alcoa stock rate the shares a “hold” or worse, while the 12-month consensus price target of $13 represents a premium of only about 18% to Tuesday’s close.
From a contrarian perspective, a solid quarterly report could lead some of these analysts to upgrade or increase their price targets on Alcoa stock.
Bearish sentiment is also present among Alcoa stock short sellers. Specifically, the number of AA shares sold short rose by 18% to 73.5 million during the most recent reporting period. As a result, roughly 6% of Alcoa stock’s total float, or shares available for public trading, are currently sold short.
With more than enough fuel for a potential short-squeeze play, short sellers may be getting a bit nervous heading into Alcoa earnings. For instance, AA calls have been gaining momentum heading into this week’s quarterly report, which could be a sign that short sellers are hedging their bets. Currently, the October put/call open interest ratio for AA stock rests at 0.80, indicating that calls outnumber puts among options set to expire before the end of this month.
Click to EnlargeOverall, weekly Oct. 9 series implieds are pricing in a potential post-earnings move of about 5.2% for Alcoa stock. This places the upper bound near $11.57, while the lower bound lies at 10.43. With AA eclipsing $10 in Tuesday’s trading, this region could now provide short-term technical support.
Meanwhile long-term resistance lies near $12, creating a potential trading range for AA stock over the next couple of weeks.
2 Trades for AA Stock
Call Spread: Pessimism toward an underperforming stock is largely par for the course, but AA has some potentially significant drivers that could help the shares extend their recent winning streak. Furthermore, this pent-up pessimism represents potential sideline money that could be brought to bear on Alcoa stock, especially if the shares react favorably to this week’s third-quarter report.
As such, traders wanting to take a chance on an AA rally might want to consider an October $11/12 bull call spread. At last check, this spread was offered at 27 cents, or $27 per pair of contracts. Breakeven lies at $11.27, while a maximum profit of 73 cents, or $73 per pair of contracts, is possible if AA stock closes at or above $12 when October options expire.
Put Sell: Alternately, if you’re not sold on AA stock’s upside potential, an October $10 put sell has a high probability of finishing out of the money. At last check, this option was bid at 12 cents, or $12 per contract. As usual with a put sell, you keep the premium as long as Alcoa stock closes above $12 when October options expire. On the downside, if AA trades below $10 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $10 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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